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HMRC given okay to appeal Nectar case

22 September 2008
Categories: News , CRC v Loyalty Management (UK) Ltd , VAT
Interim guidance pending Loyalty Management outcome

The House of Lords has given HMRC leave to appeal the decision of the Court of Appeal in CRC v Loyalty Management (UK) Ltd [2007] STC 59.

In the meantime, HMRC have published interim guidance, pending the outcome of their appeal, for those businesses affected by this decision.

The case concerned the Nectar loyalty scheme. The Court of Appeal found that, on the facts of the case, there is a taxable supply of redemption services by redeemers to Loyalty Management in respect of which it is entitled to input tax credit.

The payment made to the redeemer by the taxpayer company was held to be consideration for those services.

The court confirmed that all such payments to redeemers were consideration for fully standard-rated supplies (redemption services).

The matter has been referred to the European Court of Justice but, at the moment, the Court of Appeal decision represents the law as it currently stands.

Therefore, redeemers, although not party to the litigation, are nonetheless affected by it. Redeemers need to ensure that the treatment of the service charge accords with that decision, and that Loyalty Management can benefit from the decision.

HMRC say that they will proceed on the basis of their view of the law in relation to all parties, including Loyalty Management, until the outcome of their appeal is known.

Redeemers are obliged to account for output tax due on the value of the full consideration received from Loyalty Management.

Where this is not done, HMRC will assess the amounts of output tax due, subject to the usual time limits.

HMRC suggest that redeemers thus affected may wish to make protective claims for the additional VAT due, in the event that HMRC's appeal is ultimately successful.

Loyalty Management is entitled to reclaim input tax on output tax charged to it by redeemers to the extent that such claims are supported by the proper evidence, in which case HMRC say they will ensure assessments are in place to protect their position pending the outcome of our appeal.

Since the consideration paid by Loyalty Management is currently seen to be for redemption services, rewards are being supplied by redeemers to collectors without consideration or, where the collector pays cash in addition to points, for partial consideration.

The court's view was that when payment for the reward was partly cash (from the collector) and partly points, the supply was to the collector to the extent he paid for it.

Therefore, the decision does not affect supplies of rewards by redeemers to collectors for partial consideration.

However, HMRC's view is that, where the supply by a redeemer of a reward of goods is made wholly for points, and the redeemer is entitled to input tax deduction, the redeemer is making a supply of those goods (under VATA 1994, Sch 4(5)). VAT will be due, subject to the normal business gift rules.

Where redeemers have not and/or do not account for output tax due on these gifts, HMRC will protectively assess for any output tax arising subject to the usual time limits pending the outcome of the litigation.

Where redeemers do, or have, accounted for output tax due on these gifts, they may wish to make protective claims in the event that HMRC's appeal is successful.

With regard to other cases, HMRC say that until the current litigation is concluded, it is not clear on what basis other schemes might be seen as materially similar for VAT purposes, so they will continue to look at claims for similarity on a case-by-case basis.

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